00:0030-year rates are basically saying, if you're not hiking rates, then we are hiking rates.
00:04And that's why 30-year rates have just made it much more expensive to borrow, to buy a house.
00:07And as a result of that, financial conditions are tightening.
00:10And he didn't tighten financial conditions, but the market decided to say,
00:13well, then we think it's time to tighten financial conditions.
00:14And John, I know you've got a question.
00:16The key thing to me, John, is 30-year rates, 520 is a key print.
00:20We're at 517.
00:21520 is an OMG print.
00:23The price of volatility, is that what we're learning?
00:25The price of reducing guidance, reducing communication, being very, very unclear about what on earth they're going to do with
00:34policy.
00:34Are we paying the price this morning and this afternoon?
00:36But that's why the task forces will be very, very interesting, because they will certainly also, on the communication task
00:42force,
00:42they will have to discuss what is the best approach.
00:45Is it the best approach to have no forward guidance?
00:47Is it a better approach to have forward guidance?
00:49If you do not have forward guidance, you do have more volatility.
00:51But in fairness, to Kevin Walsh's point, he did say that, well, when we don't say anything, markets are reacting
00:57to the data as we go along.
00:59But the risk, of course, is that if the market is overreacting to some data, that then also needs to
01:04be resolved in the task force on communication.
01:06Namely, is that the right way to do it?
01:08Because it runs the risk, as you're saying, John, that you will have more volatility.
01:11Thurston, thrilled to have you here with this really odd press conference.
01:15There was a bombshell in there where he went back to 2014 in a paper he did on the Lucas
01:21critique.
01:22It's just slipped in there for a second.
01:24But to academic economists, that is a bombshell, what he said.
01:29And what he's basically saying is the distrust that Robert Lucas, the laureate, had of models.
01:35Are we, you know, I think of Claudia Sahn.
01:38Lisa, you mentioned this earlier, the idea of reaction functions.
01:41Is this a new, almost model-free Federal Reserve away to Lucas and even away from the giant Olivia Blanchard?
01:50It does lean into the Chicago Stanford School of Thinking, namely, that when you have a policy that you are
01:56changing,
01:56you should not run regressions and look historically at the data up to where we are now,
02:00because the change in the policy is going to change how people behave.
02:04Is there a new model then?
02:04Is there a new, fresh, worse model we need to discover?
02:07Yeah, because I think he's saying that you can't just look at all the models that look back,
02:11because when we are now changing policy, then forward-looking, people are going to change behavior.
02:16And how do you determine an inflation rate across that?
02:18If you take DSGE, Richard Clare to Gertler or Brown, if you take the mathematics of that, throw it out
02:24the window for this show.
02:25But the bottom line is inflation is the measurement we use.
02:28How will we measure inflation with a new Walsh-Lucas model?
02:33But that's exactly right, Tom.
02:34That's why if you don't have the models that look at the latest data, then what are you then looking
02:39at?
02:39What are you then relying on for forecasting what inflation will do going forward?
02:43So in other words, if I'm not allowed to look backwards and say this is where the data is coming
02:46from,
02:47and the trend is whatever this or that, well, then what am I then using as the guidepost for thinking
02:52about what inflation will do going forward?
02:53Was that nerdy enough for you?
02:5410 basis point move on 30s.
02:56There it is.
02:57Wow.
02:57Almost higher by 11 basis points and closing in on 519.
03:01I'm thinking of all the people that would be unhappy with this news conference in the last 60 minutes.
03:06Forget market participants.
03:07Imagine being at the Treasury right now and you're Scott Besson and you're seeing yields go higher on 10s, materially
03:13higher on 30s.
03:15And then I'm thinking about the others on the committee.
03:18I'm not an establishment guy.
03:19I'm very, very happy to blow things up and have a new era.
03:22I've got no problem with that.
03:24I'm open to new ideas.
03:25But I just wonder how offended some of the sitting officials might be by how patronizing much of that news
03:32conference was over the last 60 minutes.
03:34Well, it's clear that the sitting committee that he came into had already thought about basically all areas of the
03:40task forces before.
03:41So it's clear that the market here is saying, well, if we now are getting a day with no hike,
03:47well, then the long end, of course, is moving, basically telling you that, well, this is all about credibility.
03:52Are you really going to follow through on inflation?
03:54And that's, of course, the thing that the FOMC needs to go home and think about now.
03:57The market reaction speaks very clearly that now we need to talk about what is the credibility of the committee,
04:02because it cannot only be talk.
04:04You will eventually have to follow through.
04:06And that's why the probability, given this market reaction now, has gone up quite significantly that they will have to
04:11move at the next meeting.
04:12But this is really important.
04:13In other words, you're saying that the reaction, the long end of the yield curve is a challenge to the
04:17credibility of this Federal Reserve and will force their hand.
04:19That if they do not hike rates in September, you will see some sort of unmooring of long-term yields.
04:25Yeah, because the risk is if you keep on just talking tough, tough, tough, and therefore markets end up saying,
04:30well, this is just a lot of talk, and you don't deliver on that tough talk.
04:34The risk is, of course, that the long end will say, well, if you don't deliver, we worry that you
04:37are implicitly allowing inflation to be higher, despite the talk about not allowing inflation to be higher.
04:42And that is indeed a question about the ultimate credibility.
04:44Is the committee ready to vote next time?
04:47This was not only Kevin Walsh, this was nine members who voted to keep interest rates constant at this meeting.
04:52So at the next meeting, many of them must look at the reaction today and come to the conclusion.
04:56If we want to keep our credibility, we do have to move to make sure that inflation comes down and
05:02therefore ultimately long rates also begin to go down.
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